Russia’s economy continues to die a slow death, and is forecasted to contract even further this year. Europe must shine a spotlight on Russian business practices that threaten to have a global impact, writes Sir Graham Watson.

Sir Graham Watson was the Leader of the Alliance of Liberals and Democrats for Europe in the European Parliament 2002-09 and President of the ALDE Party 2011-15.

Last month, when the Litvinenko Inquiry in the UK effectively accused Russia of behaving like a terror state, it overshadowed a stark admission from Russian leadership that the country had to change. At almost the same moment as Sir Robert Owen, the Inquiry Chairman, gave his verdict on Litvinenko’s murder, Deputy Prime Minister Yury Trutnev was taking the stage in Davos. Alongside him was Alexei Kudrin, who served as Finance Minister for more than a decade.

“I don’t see any other way for us, frankly,” said Trutnev, admitting that Russia had to implement deep structural reforms to prevent its economy spiralling out of control. Kudrin highlighted “monstrous methods” used by law enforcement to attack companies, leading to massive harm for the economy and the collapse of many independent businesses. Both were clearly worried.

No wonder. The Russian economy has been in the doldrums for well over a year now and the decline shows no signs of abating. Low oil prices and international sanctions are taking their toll: the economy is expected to contract by around 3% this year. Shockingly, by 2017, the economy is forecast to be smaller than it was in 2012.

The fact that this Russian admission passed largely unnoticed runs parallel to Europe’s relations with Russia. While Europe obsesses on Russian expansionism in Ukraine and the Middle East, and political ‘assassinations’ abroad, there is a destabilising factor that is just as powerful within the country itself.

While editorials in the Wall Street Journal labelled Russia a ‘terror state’, a more accurate description would be to describe the country as a mafia state. One where corruption has been institutionalised, intimidation is a way of life and untamed racketeers have bred anarchy within the business environment.

This has led to a chronic imbalance, with previously profitable companies are concentrated increasingly in the hands of Russian robber barons. The impact of the economic decline is being felt sharply beyond the corridors of power in Moscow and beyond the circles of oligarchs: it is being felt by the general population. With expensive foreign wars to fight there is an urgent need to reform the economy and stamp out corruption. This is the problem, and the choice, that Putin and the leadership faces.

Official government statistics published at the end of 2015 showed that wages had fallen 9.2% in real terms year-on-year. The decline was the first such fall since the economic turmoil of the late 1990s. Wages did not fall even during the 2008 financial depression. Coupled with rising prices for food and other basic goods, 2016 is shaping up to be a tough year for ordinary Russians.

One avenue of economic improvement is the potential offered by the growth of private enterprises. The role of government everywhere should be to put a framework in place where firms can thrive, grow their bottom line and most importantly, pay tax and offer employment, providing wages which in turn can be spent on goods and services. Down this road lies a prosperous society. The renewed efforts to embark on a privatisation programme of state assets show this is understood.

However, the Russian business climate has been stone cold for a number of years. There has been a well-documented history of corporate raiding, which has been systemic. The country’s Prime Minister, Dmitry Medvedev, previously claimed that widespread lawlessness was stifling economic growth. That was in 2008. In the six years since, little has changed. Corporate raiding is still ingrained and the prevalence of the practice shows no signs of fading.

Corporate raiding follows a familiar playbook. Whether we are talking about an attack on Hermitage Capital, Smarts or TogliattiAzot, in each case well placed individuals have taken advantage of their personal connections within the police, judiciary or political hierarchies to seize assets they covet.

Corporate raiding is facilitated by the system: fallacious lawsuits are brought; trumped up tax penalties imposed; and illegal raids on assets. Former business ombudsman Boris Titov said in 2013 that some 600,000 criminal cases had been opened against entrepreneurs in the preceding three years and that 110,924 of them had led to prison terms. This sends a very direct message that Russia is far from being open for business.

Take the most recent, and ongoing example of corporate raiding, at TogliattiAzot. Some 10,000 people are employed by TogliattiAzot, making it one of the largest industrial producers, employers and taxpayers in Russia. Attacks have been ongoing since 2005, as a result, the company has been dogged by uncertainty.

The case against TogliattiAzot, orchestrated by well-connected oligarch Dmitry Mazepin, is particularly important from an economic point of view. If Mazepin’s fight to take control of TogliattiAzot is successful, he will control 20% of the world’s ammonia production directly and consolidate his hold on this multi-billion-dollar industry in Russia.

The continuing and relentless attack by Mazepin offers a test of whether the Russian Government will tolerate yet another asset grab by corporate raiders – or if it will make clear to the business community and investors that corporate conflicts must be resolved in a legal and business-like way. If the raid is successful it would be another nail in the coffin for Russia’s reputation as a place for investment.

If the Russian government wants to put business first and get the Russian economy working again then it needs to create a clear and fair legal regime for business and put an end to corporate raiding. Europe needs to turn the spotlight on the routine abuse that goes on in business circles in Russia. The minimal coverage of the Davos debate was telling.

While we endlessly dissect Russia’s effect on a geo-political level, we largely ignore the fact that there are fundamental issues in the Russian economy that distort global commerce and that may bring the whole house of cards crashing down, just like it did in the late 80s.

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7 responses to “Europe’s other Russia ‘problem’”

The USA will be EU’s biggest foreseeable problem come Nov. There is a political revolution taking shape in America. Personally, I would be happy if the next Treasury appointment isn’t from Goldman, the next FDA chief isn’t from Pfizer and the next Secretary of Defense doesn’t have ties to Lockheed Martin. With only five EU countries meeting their expenditure goals for defense (US has just shelled out another 3.5 billion dollars for NATO’s European defense) Russia is the least of our problems. The west’s sponsored armed coup in Ukraine might also be defined as a terrorist attack against a duly elected democratic government. It’s really all elementary my dear Watson, feel the Bern, it’s coming.

Although Russia is having a minor economic hiccup like much of the West, the world of European bankers is frustrated that Russia is still making a small profit. Russia is still inventing and exporting vigourously, and even trading with its nemesis the USA. Russia has almost no debt. Not only that, Russian enterprise is making strong advances in many new areas like China, Egypt, and India. This kind of growth is not done within a corrupt environment. Europe would like to believe that Russia is bankrupt and corrupt, and European “Liberals” are greatly chagrined to see that it isn’t so.

Western nations create wars in Ukraine, Syria, Iraq, Libya, Afghanistan, and fly drones all over Africa and the Mid East to kill innocent people then request more troops put out the fires only to fan the flames and create need for more troops. Even with the NATO creep towards Russia Putin played nice until the US coup in Ukraine. Now he is spending big bucks on his military in response and the Baltic fiefdoms think they need more troops in eastern Europe.

The European economy is far from healthy , unemployment is still high and youth unemployment is in the stratosphere. Did I mention the farming disaster Belgium imposed on the European agriculture community by imposing sanctions on Russia? That one back fired big time! The west always tries to divert attention from their failures by ostracizing Russia. DAVOS failed to address the inequality issues this last go round. WHY? Because they are the people directly responsible for the collapse in the middle class societies throughout the world.

The sanctions against Russia are ‘Europe’s problem,’ stated Russian Foreign Minister Sergei Lavrov in Moscow on Monday. Lavrov said Russia will not discuss conditions to lift the sanctions imposed by European Union and the United States as “they are illegitimate.” The Russian foreign minister also spoke of the need of “absolute ceasefire” in Ukraine, following news of shelling once again hitting civilian areas in the east of the country.